GWU - Econ 182
International Finance Theory and Policy
Course Syllabus

by Steven Suranovic ©2005

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This course will be an overview of international macroeconomic theory and policy. The course will present economic theories to foster understanding of the interrelationships of economic aggregates such as GDP, unemployment, inflation, exchange rates and trade balances. The course will apply these models to understand the effects of fiscal, monetary and exchange rate policies. Students should have a working knowledge of basic algebra, graphical techniques and the basics of Micro and Macro economics.
 

	Professor: Steve Suranovic
	Time & Location:         Jan 18 - May 5, 2005         TR 12:45 - 2:00pm, Funger 103
	Office: 1957 E St. N.W., Room 501M
	Office Hours: Tues 4pm - 7pm
	Office Phone: 994-7579
	E-mail: smsuran@gwu.edu
	Teaching Assistant: Dong Soo Kim
	Office: Old Main - Room 217
	Office Hours: TTh 10:30-12
	E-mail: dskim@gwu.edu

Evaluation
	2 Quizzes	10% each
	1 Midterm Exam	35% each
	1 Final Exam	45%

Textbooks
	Steven Suranovic     International Economics: Theory and Policy     Online Lecture Notes at     http://internationalecon.com/v1.0/Finance/index.html

Assignment Schedule
	Quiz #1	Feb 15, 2005
	Midterm Exam	March 10, 2005
	Quiz #2	April 12, 2005
	Final Exam	Tuesday, May 17th

Note: Any student who feels s/he may need an accommodation based on the impact of a disability should contact Disability Support Services, Marvin Center 242, 994-8250, to have the disability documented and reasonable accommodations coordinated.

	Course Outline
Week of Jan 17	No Class Thurs Jan 20 - Inauguration Day Intoduction to Course This session introduces students to the course content over the semester. Readings: Chapter 5 - National Income and the Balance of Payments Accounts Sections 5-1 to 5-4
Week of Jan 24	National Income Accounts This session introduces students to the national income accounts. Students are shown how aggregate data are recorded and interpreted. Readings: Chapter 5 - National Income and the Balance of Payments Accounts Sections 5-1 to 5-4 Supplementary Readings: US National Income and Product Accounts (NIPA) the most recent US data is available here from the US Bureau of Economic Analysis. In the News: Global economy remains unbalanced: Absa : Sunday Times: South Africa, Jan 2005 U.S. 4th-Qtr GDP Grew at Less-Than-Expected 3.1% Rate: Bloomberg, Jan 2005 Google Search on: GDP Growth National Income Accounts
Week of Jan 31	The Balance of Payments This session introduces students to the balance of payments accounts. Students are shown how specific international transactions are recorded and are shown the interrelationship between the current and capital account balances. Readings: Chapter 5 - Balance of Payments Accounts Sections 5-5 to 5-8 Twin-Deficit Identity Statistics: US and China Supplementary Readings: US International Accounts Data the most recent US data from the US balance of payments accounts including the US international investment position available here from the US Bureau of Economic Analysis. Practice Problems: Jeopardy Answers 5-1 Problem Set 5-1 Problem Set 5-2 Problem Set 5-3 In the News: Thrift is a foreign concept: Economist: UK, Jan 2005 Greenspan tries to reassure on rising US deficit : Times Online: UK, Feb 2005 Google Search on: Balance of Payments Twin Deficits
Week of Feb 7	Evaluation of Trade Imbalances This session dispels the popular notion that trade deficits are "bad" and trade surpluses are "good". The material highlights the intertemporal borrowing and lending associated with trade imbalances and notes situations in which each of these could be appropriate (or inappropriate) for both individuals and for nations. Key factors needed to determine the seriousness of a trade imbalance are discussed and a case study for the US is presented. Readings: Chapter 5 - Balance of Payments Accounts Sections 5-9 to 5-10 Chapter 6 - The Whole Truth about Trade Imbalances Sections 6-0 to 6-3 How to Evaluate Trade Imbalances article that identifies conditions when trade imbalances may be problematic or non-problematic. Supplementary Readings: A Multi-Country Evaluation of Trade Imbalances: China an article by GW-Elliott School MA students which evaluates the trade imbalance experience of the United States. A Multi-Country Evaluation of Trade Imbalances: The United States an article by GW-Elliott School MA students which evaluates the trade imbalance experience of the United States. America's Maligned and Misunderstood Trade Deficit an article by Daniel Griswold at the Cato Institute offers some reasons why the US trade deficit is not a cause for great concern. Note especially the graph showing the relationship between the US trade deficit and the unemployment rate. Practice Problems: Problem Set 6-1 Problem Set 6-2 Problem Set 6-3 Google Search on: Trade Deficits Trade Surpluses
Week of Feb 14	The Foreign Exchange Market This session introduces students to the foreign exchange market. It includes an overview of market participants, and exchange market terminology. Histories of some curriencies fluctuiations are presented. Readings: Chapter 10 - Foreign Exchange Markets Sections 10-1 to 10-5 Economist Economic Data: From Feb 12, 2005 In the News: Dollar Down, Look Around : Hartford Courant: from LA Times, Jan 2005 U.S. powerless to dollar's plunge?: CNN International: Jan 2005 Practice Problems:   Problem Set 10-1   Problem Set 10-2   Problem Set 10-3a   Problem Set 10-3b
Week of Feb 21	Interest Rate Parity This session highlights the linkage between the exchange rate, and interest rates through the interest rate parity condition. It is shown how changes in economic variables can affect differential rates of returns which in turn can affect the value of the exchange rate. Readings: Chapter 20 - Exchange Rates, Interest Rates and Interest Parity Sections 20-1 to 20-11 Practice Problems: Problem Set 20-1 Problem Set 20-2 Problem Set 20-3
Week of Feb 28	Monetary Policy, Interest Rates and Exchange Rates Readings: Chapter 40 - Interest Rate Determination Sections 40-1 to 40-14 Practice Problems: Jeopardy Answers 40-1 Problem Set 40-1
Week of Mar 7	GDP Determination Readings: Chapter 50 - National Output Determination Sections 50-1 to 50-11 Practice Problems: Problem Set 50-1
Week of Mar 7	Midterm Exam Thursday, March 10 in class.
Week of Mar 14	No Class - Spring Break
Mar 21	The AA-DD Model This session uses the AA-DD model to asses the effects of fiscal and monetary policy in a system of floating exchange rates. Both short-run and long-run impacts are considered. We'll also look at the predictions of the model for a sterilized monetary intervention. Readings: Chapter 60 - The AA-DD Model Sections 60-0 to 60-8 Practice Problems: Problem Set 60-1
Mar 28	Fiscal and Monetary Policy with Floating Exchange Rates This session uses the AA-DD model to asses the effects of fiscal and monetary policy in a system of floating exchange rates. Both short-run and long-run impacts are considered. We'll also look at the predictions of the model for a sterilized monetary intervention. Readings: Chapter 70 - Policy Effects with Floating Exchange Rates Sections 70-0 to 70-2 Practice Problems: Problem Set 70-1 Problem Set 70-2 Problem Set 70-3
Week of Apr 4	Purchasing Power Parity This session presents the theory of purchasing power parity. The logic of the theory as an explanation for exchange rate movements is provided. More importantly, the supplemental readings help teach the way PPP exchange rates are used to make international comparisons of economic data. Readings: Chapter 30 - Purchasing Power Parity Sections 30-1 to 30-4 The Economist Big Mac Index Supplementary Readings: PPP FAQ an excellent summary from the OECD. A MUST READ! Comparative Price Levels for OECD countries -December 2003 these numbers are the same as the real exchange rates. Video: Economist's Big Mac Index this video clip explains PPP by comparing Big Mac prices around the world. Lattenomics from the Economist a new theory percolating through FOREX markets. National GDP Comparisons scroll down the page to see 2003 GDP comparisons using PPP exchange rates. Practice Problems: Problem Set 30-3 Problem Set 30-4
Week of Apr 11	Long-Run Effects of Monetary Policy; Central Bank FOREX Interventions; Fixed Exchange Rates This session introduces discusses long-run effects of monetary policy and central bank interventions in a floating suystem. Next fixed exchange rate systems are introduced and it is shown how central bank intervention is necessary to make them credible. Readings: Chapter 70 - Policy Effects with Floating Exchange Rates Sections 70-3 to 70-4 Chapter 80 - Fixed Exchange Rates Sections 80-0 to 80-9 Classification of Exchange Rate Arrangements and Monetary Policy Frameworks IMF's June 2004 description of different types of exchange rate regimes and a listing of countries applying each regime.   Practice Problems: Problem Set 70-4
Week of Apr 18	Policy Effects with Fixed Exchange Rates Readings: Chapter 90 - Policy Effects with Fixed Exchange Rates Sections 90-0 to 90-5 Practice Problems: Problem Set 90-1 Problem Set 90-2
Week of Apr 25	Gold Standard, Bretton-Woods, and Current Issues. This session looks at historical fixed exchange rate systems and discusses their workings and failures Readings: Chapter 80 - Fixed Exchange Rates Section 80-2 The Gold Standard A description of the Gold Standard by Michael Bordo in the Concise Encyclopedia of Economics. The Monetary Breakdown of the West A 1980 article by Murray Rothbard that briefly traces the International Monetary system from its Gold Standard days in the 1800s to the collapse of the Bretton-Woods system in the 1970s. As an Austrian economist, Rothbard advocates a return to a gold standard. However, this view predates the success of the US FED to control inflation since 1982. Practice Problems: Problem Set 100-1 Supplementary Readings: Lessons from the Asian Crisis Keynote address by Anne Kreuger,First Deputy Managing Director, IMF, SEACEN Meeting Sri Lanka, February 12, 2004. The Pre-World War I Gold Standard An article by Brad deLong provides an overview of the plusses and minuses of the gold standard. Fixed vs. Floating Exchange Rates An article by Peter Kenen that provides a few of the arguments for and against fixed exchange rates. In the News: China's exchange rate: Economist Feb 2005 .
Week of May 2 We only meet Thurs this week	Fixed vs Floating Exchange Rates Readings: Fixed or Flexible? Getting the Exchange Rate Right in the 1990s A 1998 article by Francesco Caramazza and Jahangir Aziz from the IMF describing the differences between fixed and floating exchange rates. Supplementary Readings: The Unsustainability of U.S. Trade Deficits An article by John Quiggin that provides an overview of the problematic US trade deficit.
Week of May 2 We only meet Thurs this week	Fixed vs Floating Exchange Rates Practice Problems: Problem Set Review 1
Final Exam	Tuesday May 17, 2005     12:40 - 2:40pm, Funger 103